The paper re-examines the concerns on the rule-based governance in poor institutional environment. By relying on the theories and research vehicles of social psychology, we show that under certain conditions, the ‘law on books’ may still play role in governing market transactions, even though no formal enforcement applies. We furthermore expose the potential of the Corporate Governance Code as the ‘signaling device’ and provide arguments as to why this potential may be even stronger in an environment with relatively weak institutions in comparison to the developed market economies.

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This paper investigates bank-borrower relationships in an advanced transition country. The empirical analysis is based on a unique dataset of 121 privatized small and medium-sized Slovenian corporations in the first years following the end of the banking sector’s reorganization (1998–2002). The results reveal the strong dominance of bank funding for small and medium-sized enterprises. Despite this, the firms included in the study are characterized by a small number of bank relationships. The specifics of the transition are moreover reflected in the substantial role of fixed assets that can be put up as collateral. However, the number of bank relationships relates to similar factors that have been proven to influence the number of firm-bank relationships in developed countries. We thus expect that the number of bank relationships in Slovenia will increase with the progress of restructuring and privatization of the enterprise sector and with the integration of financial markets following Slovenia’s entry to the European Union.